FYI | Aug 29 2007
By Greg Peel
The S&P/Schiller US home price index for the second quarter was released last night. This index specifically tracks price movements in existing single-family homes across the US nation. The index fell 3.2% – the worst quarterly decline since its origination in 1987. The median of the top twenty US cities fell 3.5% year-on-year. The top ten fell 4.1%. These numbers were calculated up to the end of June. The credit crunch began in earnest in July.
The New York Conference Board consumer confidence index for August was released last night as well. This is a more up to date figure. It fell to 105.0 from 111.9 in July. While the fall looks dramatic the number was still above consensus expectations of 104.5, and the July figure had been the highest in six years. But Wall Street was in no mood to split hairs.
And while calm may had returned to Wall Street these past several days, there was no denying an ongoing undercurrent of nervousness. The market has clearly been prepared to bail out at any sign of danger. No more was this evident than in last night’s trading, which was a game played in two halves. The Dow fell 140 points on the economic data, levelling out at the half-time break. But at 2pm the minutes of the August 7 FOMC meeting were released, and the Dow fell another 140 points.
Have you ever attended a football match where your team has lost, and then joked that if you go home and watch on TV maybe they’ll get up in the replay? Well it was no joke at 2pm last night in New York.
This is an excerpt from my overnight report the day after the Fed left rates unchanged on August 7:
“Most notable in the Fed statement was that the central bank’s predominant concern ‘remains the risk that inflation will fail to moderate as expected’. This is notable because it’s exactly what Bernanke said last month, and pretty much the stance taken ever since Bernanke took over from Greenspan. If the Fed is still worried about inflation, that means it still expects positive economic growth. Thus, while the housing crisis was acknowledged as not being over, the market can be assuaged that the Fed does not believe the credit crunch will upset the bigger picture – the Goldilocks scenario.”
And this is an excerpt from my overnight report following the Fed’s cutting of the discount rate on Friday, August 17. It comes from the accompanying Fed announcement:
“Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.”
The only logical conclusion one could draw from these two excerpts is that the game had appreciably changed from August 7 to August 17. Yet last night Wall Street was looking for signs in the FOMC minutes of August 7 that a cut in the Fed funds rate (the cash rate) might be forthcoming. It hasn’t come so far, and this has made traders increasingly edgy. Will it come on September 18? Well maybe the previous minutes might provide a clue…
And of course, there was no clue. There was no talk of a rate cut at all. So the market was sold off again. Logic is the first casualty of uncertainty.
And just to add to the mood, Merrill Lynch financial sector analysts chose to downgrade Lehman Bros, Bear Sterns and Citigroup from Buy to Neutral ahead of their September third quarter profit pre-announcements. Their shares fell 6%, 3.4% and 3.5% respectively. There has still not been any news forthcoming from these institutions as to the full picture of losses in hedge fund loans and mortgage security investments.
The Dow fell 280 points by the close, or 2.1%. The S&P and Nasdaq both fell 2.4%.
Across other markets, it was a return to the bad old days before the Fed discount rate cut. Yen carry trade unwinding reignited sending the US dollar down against the yen and the Aussie dollar crashing once more to US$0.8155. The US dollar rallied against the euro and the pound as money looked for a safe haven. Assisting the euro’s fall was a statement from the ECB president hinting that the previously expected rate hike would no longer occur. The flight to Treasuries continued as the ten-year bond yield fell from 4.57% to 4.52%. Gold went back into liquidation mode and fell US$4.70 to US$662.20/oz. Oil fell US24c. Base metals were down across the board.
The irony is – with regard to the Fed and its mindset – that the sort of data coming out now is only going to encourage a rate cut come September 18, irrespective of the earlier focus on economic strength. What’s more, the Fed governors are currently on retreat in Jackson Hole and on Friday Bernanke will make a statement as to their discussions. This statement will supersede not only the August 7 minutes but the August 17 statement as well. And the US second quarter GDP number is released on Thursday.
The confidence that had been building even more emphatically in the local market these past several days will no doubt also be tested today. The SPI Overnight opened under a blood-red sky and traded down 129 points by the close.
